RBI seeks deficit cuts, slashes GDP growth to 5.5% in FY13

India’s economy appears on track for its worst financial year in a decade with a Reserve Bank of India (RBI) conducted survey pegging the country’s GDP growth rate for 2012-13 at 5.5%, the worst since 2002-03.

Amid growing clamour for a cut in interest, RBI's macro-economic review obliquely hinted on that the central bank had limited room to slash lending costs hemmed by the twin deficits-current account and the fiscal deficit.

The RBI is expected to lower interest rates in its quarterly monetary review on Tuesday.

India’s current account deficit (CAD) — the difference between export earnings and import expenses net of cash payments and remittances — has widened to 5.4% of GDP forcing the government to raise customs duty on gold by two percentage points to 6% discourage imports..

“At the current juncture, the widening CAD has become a major constraint on easing monetary policy,” the RBI said in its survey of professional forecasters. “Even if inflation recedes further, the wide CAD may slow the pace and extent to which monetary policy can be eased.”

Wholesale prices inflation has touched a three-year low of 7.18% in December, but consumer price inflation-a more realistic cost of living index because it captures shop-end prices-has shot up to a worrisome 10.56% last month.

The RBI uses monetary tools to stymie demand and cool prices.

The RBI is widely expected to reduce the policy repo rate-the rate at which it lends to commercial banks-- by 0.25 percentage points to 7.75% in its policy review on Tuesday, making its first cut in nine months.

The central bank also said more reforms are required, especially in road and power sectors, to remove investment bottlenecks. “On the whole it appears that the reform measures taken so far have not decisively lifted business sentiments and further action may be needed to restore confidence,” it said.

The survey also revised down the average wholesale price index inflation forecast to 7.5% from the earlier 7.7%. In October, the RBI had forecast that inflation would hit 7.5% by March, though December’s rate of 7.18% was the lowest in three years and better than the bank had expected.